# The Quick and Dirty Math Required to Calculate Your Financial Independence Number

The calculation of your financial independence (FI) number is simple and easy to do.  You need enough income to cover your expenses.  2 variables, that's it,  Income and Expenses.  You can adjust your income or you can adjust your expenses.

Before we get into those, lets figure out a target to aim for.  Most personal finance experts agree that saving 25-30 times your yearly expenses will get you covered.  This means that if your expenses are \$60,000 per year, you need to save \$1.5-\$1.8 million.  The way they get to these numbers is to assume your \$1.5-\$1.8 million will generate a 3.33%-4% return.  Pretty conservative but fairly standard for retirement planning.

I'm not going to get too far into details on expenses in this article, but the take home point is that for every dollar you can lower your expenses by, means \$25 less of your nest egg that you need to save before reaching FI.  At the same time, you don't want to sell yourself short on life's experiences.  You need to figure out a balance that works for you and factor that in when you are constructing a lifestyle that will make you happy.  If you are scrimping and saving every dollar at the expense of your happiness you aren't doing anyone any favors!  Do what makes you happy, just not at the expense of blowing up your budget.

Expenses are the most controllable item in your budget.

Control what you can control.  Unfortunately, most of us are in a position where most of our income is sourced from a job where we have little to no control over.  You could try to ask your boss for a raise, but see how far that gets you in today's economy!  Especially if you work for a big corporation.  These types of things have to be approved by your managers managers manager.  Good luck with that one!

For entertainment purposes, lets say you try this one.  You bust your butt working hard, putting in an extra hour each day as well as skipping lunches and breaks to show the boss you mean business.  Your boss is impressed with your level of commitment and agrees to boost your salary by \$5k!  Before you pop the champagne, lets break it down.  You've just given up an extra 10 hours a week that you used to own.  Thats an extra 500 hours a year to get you that \$5k.  When you do the math, thats 10 bucks an hour.  Less than minimum wage!

You could pick up another job or work more hours at your current job (if you are paid hourly).  I don't know about you but I don't want to trade any more of my time for money.  Let's say you try this out and increase your job income.  What happens?  Even more of your paycheck starts going to taxes and you are left with increasingly lower returns for your money.  We have precious little time on this planet and we want to make the most of it.

Trying to increase job income offers little control and only serves to decrease the amount of free time you have.

You could start your own business.  This is an intriguing option and certainly could prove to be quite fruitful.  The issue with this one is the incredibly high start up costs of time and money.  Whatever business you go into, you are going to need a bunch of money to get started and be willing to invest insane amounts of time, especially in the beginning.  Then there's the chance that your business could fail.  Most businesses fail within the first 5 years of startup, so there's that! The interesting thing is that these business don't fail for the reasons that you think.  No, it's not the level of competition or the running out of money that causes this. It's the person starting the business losing focus and not being willing to commit 100%.  Fair enough.  It takes a special person to commit enough to their business to will it to succeed.

All in all, this income option offers a higher level of control, but requires a very high level of commitment and large start up costs.

Option 3 for boosting income is to increase your investment returns.  'But Nick, higher returns mean higher risk!  I can't afford to blow my nest egg on some risky penny stocks to try to squeeze higher returns out of my investments!'  Definitely true, for most investments.  The exception: you guessed it, real estate.  When you know what you're doing, 15-20% total annual returns are fairly common.  Yes of course there is risk with this type of investment, but less risk than the stock market to be sure.

Don't forget to mention the fact that when you invest in the right market, you get paid 5-10% of your investment amount annually in cash while your money is tied up in the investment.  You don't have to sit and wait for that payday when the investment is sold.

Think for a minute what this could mean for your income.  \$100k invested in real estate earning 15% turns into \$201k after 5 years, \$404k after 10 years and \$1.6 million in 20 years!  You've just reach your FI goal with a startup investment of only \$100k!  Let me tell you from experience, these kinds of returns are very real and this goal is very achievable.

The best part about this kind of income, when you invest with us, your role is completely passive.  You are free to do as you choose, not needing to put in any extra time, as you would with any other type of income.  You just sit back and collect your 5-10% cash flow that gets deposited into your bank automatically.  On that \$100k you have invested in our example, that means \$5,000-\$10,000 annually.  I would take that over working an extra 500 hours or taking a huge risk of starting my own business hands down!